CABLE AND TELECOM PINNING THEIR HOPES ON VoIP

Cable and telecom executives said VoIP had the potential to displace the Public Switched Telephone Network (PSTN) as it operated today. Speaking at a Precursor Group investors conference Tues., Vonage CFO John Rego said he believed VoIP would completely replace PSTN within 20 years. No one on the panel disagreed with his assessment. Verizon Pres.-Network Services Paul Lacouture said he believed traditional circuit switches would be traded out and replaced over the next 2 decades. Consumers already are beginning to make their phone calls over VoIP, but they “just don’t know it” because the technology is invisible to them, he said.

Cablevision Pres. Tom Rutledge said his company’s Optimum Voice product already was E911 compliant and would comply with any federal regulations imposed. Comcast Senior Vp. Mark Coblitz said the “videophone” could soon become a standard technology, putting video and voice together. Rutledge said the capital costs kept coming down so much he couldn’t seem to budget low enough. “It’s cheaper to do and cheaper to run” with more customers, he said.

Asked about Pulver and the notion of peer-to-peer free phone networks, the panelists were critical of what they said were “quality-of-service” issues. Rutledge said a computer- to-computer network wasn’t as good. “There is a difference between being on the Internet and using IP,” he said. Rego said the free network came with a lot of spam and “bizarre phone calls coming into your home.” Lacouture also questioned its future: “It’s not really free. You're going to take some baggage.”

Precursor’s Scott Cleland said his analysts calculated that VoIP cost 1/50th the capital expenditure outlays of traditional service. Other panelists didn’t think it was quite that much, but said VoIP represented significant savings. Rego said those outlays were practically nonexistent for Vonage because the customer paid the Internet service provider, whether cable or DSL, and it was just the Vonage software. Saying that Vonage was riding over infrastructure built by others, Coblitz said: “Frankly, that’s okay. We have other things that we will do because we built the network.” In fact, Rutledge said he thought Vonage was increasing “take” rates on cable modem service.

Asked to compare cable and DSL, Vonage’s Rego said 70% of its customer base had cable modem service, 30% DSL. He said there were virtually no quality-of-service issues with cable, but there were some with DSL because some customers weren’t “getting the appropriate bandwidth” from phone companies.

Rego said he would like to see a regulatory free zone for VoIP for the next 5-10 years to allow the service to develop further. He said Vonage already paid into the Universal Service Fund, paid access fees and did CALEA and E911 without regulatory pressures. The FCC is set to unveil a rulemaking on VoIP tomorrow (Feb. 12), but Rego said the FCC eventually would have to build a regulatory framework around a whole new industry, once VoIP displaced PSTN. Lacouture said, “You're going to see the public switched network going that way anyway.”

On an earlier panel, FCC Comr. Abernathy said it was important that the Commission act quickly and decisively on deciding issues surrounding VoIP such as access charges. “The longer we futz around with this decision… the more opportunities there are for arbitrage and playing around with the regulatory framework and I think that that’s shame on us if we can’t resolve these issues,” she said. Comr. Adelstein expressed hope that broadband over powerline would have great promise for the future. -- Brigitte Greenberg

Precursor Conference Notes…

The VoIP notice of proposed rulemaking (NPRM) will remain on the FCC agenda, despite some speculation it might be removed before the agency’s open meeting Thurs., Chmn. Powell said in response to reporters’ questions after speaking at a Precursor investment conference. He also told reporters “there will be some discussion” of intercarrier compensation in that NPRM. “God willing, we'll finish [intercarrier compensation] this year,” but it’s a hard task, he said. “All companies know it has to be fixed,” he said: “It can’t go on much longer” the current way. He said intercarrier compensation was not a VoIP problem. Because different types of voice providers grew up in different points of history, they have to pay differently, he said. That distortion creates much regulatory arbitrage that distorts the market, Powell said. “Intercarrier compensation is about fixing that system to harmonize” those differences, he said. The VoIP “intercarrier compensation problem is the latest version of an old problem,” he said. As for the public policy issues facing VoIP provision, such as 911, access for law enforcement and universal service, Powell said “let’s talk about not only solving them but making them better.” For example, he said, “maybe there are more creative law enforcement solutions than wiretapping.” ----

One of the biggest “sleeper” issues in telecom regulation is the way the FCC’s UNE-P regime is playing out in the states, FCC Comr. Martin said Tues. at a conference sponsored by Precursor. Martin said the Bell companies, and even Precursor CEO Scott Cleland, predicted the FCC’s Triennial Review Order (TRO) would offer the Bells no relief from UNE sharing because it delegated decisions to the states and set “triggers” that weren’t realistic. However, Martin said, the Bells now had made filings in many states saying they met one of the TRO’s triggers for regulatory relief. Armed with charts, Martin said the Bell filings represent markets covering 60% of the nation’s population. At issue is a TRO provision that would give the Bells relief from sharing unbundled switching if they could show there were at least 3 competitors providing residential service in a market. There’s been “a dramatic underestimation of the real world impact” of the switching trigger, Martin said. Cleland, who had asked the question about sleeper issues, participated in a Q&A with Martin at the conference. On another issue, Martin said the most important decision the FCC could make on VoIP technology would be to set an overall tone for “where the Commission is going,” what regulatory approach it plans to take. He said a proposal by Verizon Senior Vp Thomas Tauke that would require access charges to be paid whenever a carrier used the public switched network appeared to be an interesting approach. He said it was interesting that in international telecom, IP traffic wasn’t made subject to settlement rates. Other key issues before the FCC are intercarrier compensation and universal service, he said, and the emergence of VoIP only highlights their importance. -- EH ----

Asked about a Wall St. Journal report that Vodafone might be interested in buying Verizon outright, FCC Comr. Abernathy, appearing at a Precursor Group investment conference Tues., said that would be a “big deal” and could have “a lot of regulatory burdens.” She said it made sense to her that foreign companies would be interested in U.S. telecom properties. She said every merger considered by the FCC was “fact specific.” State Dept. Ambassador- Communications Policy David Gross said any such transaction must be reviewed for national security concerns. Foreign ownership of national telecom infrastructure might pose problems, he said. The Journal reported Tues. that Vodafone, in what some analysts were calling the “Big Bang Theory,” might buy Verizon, spin off the wireline operation and keep the wireless assets. With the bidding picture for AT&T Wireless not yet clear, the CWA said Tues. it backed a pairing with Cingular Wireless. AT&T Wireless has set a Fri. deadline for accepting bids, with potential suitors including Cingular, Vodafone and NTT DoCoMo. Saying there may be rival bids for AT&T Wireless, CWA Pres. Morton Bahr said the union would “urge the half-million CWA members and retirees who hold AT&T Wireless stock, as well as major pension funds and investment groups, to support a deal with Cingular. This is the only potential merger that creates the necessary scale to compete in the U.S. wireless marketplace.” Bahr said a Cingular deal would entail “a clean, one-step transaction that will receive speedy regulatory approval.” Vodafone signaled this week it also was weighing a bid for AT&T Wireless. Vodafone holds 45% of Verizon Wireless, with Verizon owning the rest. Vodafone would have to cash out of the venture with Verizon before pursuing AT&T Wireless. “We have tremendous confidence in the leadership at SBC, BellSouth and Cingular Wireless, and we believe this is the best team to bring together a successful merger and enhance long-term value for shareholders,” Bahr said. The union said “most” of its members and retirees owned AT&T Wireless stock. -- MG, BG ----

Sporting a beard and looking “California nerdy,” as one audience member put it, MCI CEO Michael Capellas offered a new image of MCI Tues., emphasizing the company’s high-tech business services, the value of network security and “software at the edge.” Appearing in a luncheon Q&A session with Precursor CEO Scott Cleland, Capellas told the audience “if you want to know where technology is going, ask the software guys.” Asked about capital spending, he said IP investment was being distributed quickly to the edge of the network closer to the user -- “the action is at the edge.” That means spending will swing this year on the hardware side to distributed nodes at the network edge, and software to keep track of those nodes. Asked about regulatory obstacles, Capellas said there’s not so much in the enterprise data market, where MCI was concentrating. “We're deep in the data center and moving up,” he said.